Question

In addition to the discounted- dividend- model approach, Mulroney ( see previous problem) decided to look at the price- earnings ratio and price- book ratio, relative to the S& P 500, for both Eastover and Southampton. Mulroney elected to perform this analysis using 2010– 2014 and current data.
a. Using the data in Tables 17E and 17F, compute both the current and the five- year ( 2010– 2014) average relative price- earnings ratios and relative price- book ratios for Eastover and Southampton ( i. e., ratios relative to those for the S& P 500). Discuss each company’s current relative price- earnings ratio compared to its five- year average relative price- earnings ratio and each company’s current relative price- book ratio as compared to its five- year average relative price- book ratio.
b. Briefly discuss one disadvantage for each of the relative price- earnings and relative price- book approaches to valuation.